Elective Plutocracies

When Obama came to power, he promised change. The kind of change Obama delivered was not the kind that his supporters thought he was going to deliver. Obama delivered Obamacare and steady progress on a number of mundane problems, but what his supporters wanted was to break the nexus of power between investment banks (“Wall St.”), politics and business.

This is a pretty big call. It’s not an overstatement to say that modern American capitalism not so much facilitated the development of the investment bank, as that investment banking was what enabled modern American capitalism. Here’s why.

The granddaddy of all investment bankers is J. Pierpont Morgan, and his biography (a good summary is here) is a list of one deal after another, and one company after another, that grew because J.P. Morgan arranged cheap debt. This led to a business environment that was not so much a free market as a patchwork of overlapping monopolies. These monopolies are the ones that to this day, so the story goes, pull the strings in Washington, both behind the scenes through lobbying and on-stage through corporate funding of candidates and parties.

To unpack this…

In the old days, the only way to raise money for a business venture was through shares. Those who wanted to put some money at risk for a higher return chose a company, put their money in, and watched as the company went broke, floundered or, in rare cases, succeeded. Typical were the East India Companies (British, Dutch, etc.), where investors invested in individual trading expeditions (see The Honourable Company for more). The investor’s capital was used to purchase the raw goods that were sent East, and they received their profits on the sale of the goods that arrived back in the West. If the ship sunk, the goods were stolen by pirates, or no one bought them, hard luck.

Fast forward to the railways boom in England in the nineteenth century, and the same thing was going on. Investors had to front pretty much the entire construction cost of the railway, and received their money back in the form of dividends if the railway succeeded, or not if it went broke. But there was a difference – whereas in the case of the East India Companies, the investor got a one-shot payout, in the case of the railways, the investors got a recurring income.

The trouble with dividends is that the entrepreneurs who start the companies don’t get anything special. I put in $1, and get a few cents a year, while you put in $19 and get proportionately more cents per year. But I’m the one putting his life on the line, not you. Why should you get proportionately the same? And how come I’m left with a crappy 5% of the company?

Whence came the age of the capitalist robber baron. I have a business idea; I invest $1, I persuade other shareholders to invest $4, and I go to a bank and borrow the other $15. You and I both get better returns, but I now control 20% of the company. That’s enough to shaft most other shareholders. 5% isn’t.

Welcome to modern business capitalism – a misnomer. What we had by the early 20th century in the U.S. was not free-market capitalism, but crony debtism. And thus, albeit with far more sophistication, it remains.

This raises two points: the first is whether there is anything anyone can do about it, and the second is whether Trump is the person to do whatever can be done.

I’m going to set debt aside as a problem. Managing the levels of debt in an economy is something for economists and technocrats, and I’m neither. I’ll just assume a technical solution is broadly available. The problem we can address with politics is cronyism.

Many investment bankers will poo-poo the charge of cronyism, and point out that banks compete for business and that anti-trust laws prevent monopolies, etc. Yes, sometimes, but that’s not the charge. The charge is that one can name the top investment banks on the fingers of both hands, that the people who run them are on a merry-go-round, and that they carve up the world’s money markets in a cartel-monopolistic way.

This rings true. At the people level, getting into investment banking is very difficult but, once you’re in, you’re in Fat City for as long as you choose to be. With barely a dozen investment banks – Goldman Sachs, DeutscheBank, UBS, Credit Suisse, BoA Merrill Lynch, JP Morgan Chase, Nomura, Societe Generale, MacQuarries, RBS, Barclays Capital – dominating the scene, it’s lunacy to think that there isn’t a “gentleman’s understanding” of where they compete and where they don’t. Hence the cartel-monopoly on debt, and hence the control on the world’s financial system.

As to anti-trust laws, they do cover collusion and price-fixing, but again, that misses the point. The point is that the barriers to entry in this field are too huge for other entrants to come in. They all have similar cost-structures, price debt (and other services) the same way, and all know who does what, where they can compete and can’t. Neither price-fixing nor collusion are needed: it’s a carve-up.

Once you have them by the balls, their hearts and minds will follow, and as the investment banks have the world by the balls on debt, politicians hearts and minds follow all too easily. Hence the title of this post: elect who you like, it’s still a plutocracy running the joint.

There is a simple way to fix this: break them up. That is do-able. No privately-held entity should be so large that its failure can crash an economy, and no set of companies should be so powerful that new entrants are for all practical purposes banned.

Will Trump do it? To the extent that he remains interested in his new job at all, he appears more interested in fighting the Seventh Crusade than in fixing America’s political system with its corrupted (not bribed, but corrupted) duopoly of power, un-replaceable senators, and free for all in political finance. But, who knows what the next ExecuTweet Order will be?